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Long: CHWY, MP, STKL, IIPR, EXPE, BYD, UAA, LVS, GH, MTCH, AMN, TCNNF, BCO, V, FISV, POAHY, IHRT, GME, EXPC Short: ZI, BYND, KR, HD, PPC, SIRI |
Below are updates on our twenty five current high-conviction long and short ideas. We have removed Hanesbrands (HBI), Stepan Company (SCL) & Molson Coors (TAP) from the short side. We have added Pilgrim's Pride (PPC) and Sirius XM (SIRI) to the short side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
CHWY
Click here to read our analyst's original report for Chewy.
Chewy (CHWY) caught a downgrade this past week, which marks the first ‘Sell’ rating from the Old Wall. Props to the analyst on putting a bold call out there like that. What’s interesting in looking at the distribution of ratings and price targets is that the average price target is just $101, which is 4% below the current trading price. That suggests to us that we’re going to see a wave of downgrades, or a series of price target increases.
We think that as CHWY laps covid customer additions, bearishness will naturally ramp, but that the company will show considerable growth in spend per customer, which will prove the bears wrong, and ultimately take price targets higher.
MP
Since MP Materials (MP) was added to Investing Ideas (as FVAC) in August 2020, shares have run-up significantly. It's worth reviewing Industrials analyst Jay Van Sciver's original long thesis for clarity.
STKL
Plant-based foods are growing at a double-digit rate, but the emerging category is still less than 1% of the overall grocery market. The U.S. market for plant-based foods reached $5.5B in 2020 with growth of 11.4% according to the Plant Based Foods Association (PBFA) and The Good Food Institute. Plant-based beverages are the largest sub-category at $2B with growth of 5%.
There are many drivers to the category which makes the future growth “visible.” SunOpta (STKL) trades at a discount to other Food Tech and Plant-Based companies. The valuation gap will likely narrow as more investors rethink how they view SunOpta and its growth prospects within the plant-based food category.
IIPR
Arizona’s operators are moving closer to the start of recreational sales. The state could begin sales any day now, less than three months after voters backed legalization on Election Day. The consensus when around when AZ would start recreational sales was the spring. If sales do indeed begin in the coming days, it will establish a new record for launching a recreational market following a referendum. The fastest turnaround to date was eight months in Nevada.
Innovative Industrial Properties (IIPR) is uniquely positioned to benefit from the growth in legal cannabis. Despite the pandemic, cannabis has continued to grow at a high rate in 2020 as seen in the following chart. With several states legalizing cannabis during the November election future growth also looks promising. Since cannabis is still listed as a Schedule 1 controlled substance by the federal government the industry has limited access to capital.
By providing capital through sales leasebacks IIPR enjoys very attractive rent yields. IIPR is currently the only publicly traded REIT focused on the growing cannabis sector.
EXPE
Another update for a key topic for us – mix shift within hotel distribution channels. Given the dearth of business travel and group demand, hotels have and will continue to lean more heavily into the OTA channel. Based on proprietary data from Kalibri Labs through December (released yesterday), it appears that similar trends from the early recovery days are holding true; following property direct (walk-ins mostly), OTAs continue to outperform most other demand channels and are still exceeding the growth driven by brand.com (e.g. Marriott.com).
The gap vs the brand.com has narrowed a touch but that’s more a function of seasonal slowdown in leisure demand (ex. the holiday spurts). However, the broader outperformance persists and this should be a relative benefit moving into ’21 and more leisure demand can be stimulated as the vaccine is disbursed. GDS and Group are more representative of business travel and those channels continue to fall around 80-85% YoY, which is consistent with what we’re hearing from management teams so far.
Overall demand remains soft but we’re more focused on the trajectories across different channels, which continues to favor the OTAs. We remain bullish on the OTAs, particularly Expedia (EXPE) (top idea).
BYD
Following that address by Cuomo, Governor Lamont (Hedgeye’s home state), voiced his support for legalizing sports betting and iGaming in Connecticut at some point in the near future. Stressing that CT needs to be competitive with its surrounding areas of NY and NJ, not to mention the state’s gaping budget deficit. CT will have some hurdles as it will need to strike a balance with both Mohegan and Foxwoods which have argued for exclusivity in the past, but ultimately we see a decent shot of CT getting it done.
All bodes very well for the Sports Betting industry and the stocks but we continue to see a lot of opportunity for a stock like Boyd Gaming (BYD) to get more of the credit it deserves in Sports Betting + iGaming. BYD remains our top pick in domestic gaming.
UAA
On Friday the International Olympic Committee came out with a statement saying that the rumors that the Tokyo Olympic Games being cancelled are ‘categorically untrue’. Good news for the Athletic Brands, including Under Armour (UAA), who use the games as a platform to launch new product and commercially tie in to top performing endorsees.
In fairness, UnderArmour only has about $350mm in off balance sheet liabilities associated with endorsement deals, compared to $10bn+ for rival Nike. But UAA has been getting much smarter in tying its endorsements around actual product instead of simply streaming player/team reel highlights without making them commercially viable. It’d have been a blow to UAA if the Olympics were cancelled. Let’s hope the IOCC sticks to its statement around the games actually coming to fruition.
LVS
It’s no secret that we’ve been big fans of doing something with Sands Cotai Central; anything really – the worst option is to do nothing. Las Vegas Sands (LVS) has been successful with city themed properties in Macau (Venetian and Parisian) so the Londoner makes a lot of sense. Phase 1 of the Londoner will officially launch on February 8th, ahead of Chinese New Year (CNY). The 1,200 all suite Londoner Hotel actually opened today.
Now I do want to caution people that while The Londoner would otherwise be a catalyst for increased visitation to the market in a normal environment, Macau is not in a normal environment. The governments of Macau and China are limiting access to Macau and CNY nor The Londoner will change that much. A new Covid case in Macau – the first in a long time – probably won’t help. Nevertheless, visitation and GGR growth should continue to increase each month, but the sequential improvement will be slight until Macau is fully vaccinated so it might be the spring when market growth step functions higher.
We like LVS long term quite a bit. As the market normalizes, we expect LVS to gain share due to the Londoner and additional suites, very high end suites, at Four Seasons and St. Regis. The potential for the Londoner is very high as we’ve outlined previously. Consider the following chart that shows how much SCC underearns. The upside is clearly huge.
GH
Guardant (GH) has had a great start to the year with a seemingly continuous flow of appearances and positive news. Following their presentation at the 39th Annual JP Morgan Healthcare Conference and announcement of a full suite of product updates for their colorectal cancer liquid biopsy platform for the upcoming ASCO meeting, CMS released their decision memo for screening for colorectal cancer - blood-based biomarker tests.
The posted final NCD and decision memo is in-line with expectations (74% sensitivity and 90% or better specificity). "The currently available Epi proColon® test does not meet the criteria for an appropriate blood-based biomarker CRC screening test."
We highlighted Guardant's ($GH) data at #JPM21 last week, and it's LUNAR-2 data does meet the cirtieria. While $EXAS has Cologuard and Thrive, and is clearly working on this, the data released thus far is broader and not specific to screening. This race is a must-watch. We remain long on the Hedgeye Health Care Position Monitor.
MTCH
Below is a slide from Communications analyst Andrew Freedman's thesis points underlying his long Match Group (MTCH) call.
AMN
Prior to their appearance at the 39th Annual JP Morgan Healthcare Conference, AMN Healthcare (AMN) uncharacteristically pre-announced a “solid-looking” beat on the top line (50% above the guide). During the appearance, they shared further details on elevated demand for the Nurse and Allied segment centered on a combination of themes including recovery and meeting incremental needs. Management cited the acquisition of Stratus Video as an example of ways that they are bolting on services that their clients have expressed interest in.
Based on their comments and our own field work, we foresee a set of four tailwinds that will occur in rapid succession to bolster AMN’s value proposition in the near- term. The first tailwind cycle has already occurred in which we have seen nurses that were experiencing “burnout” retiring early or leaving the industry temporarily/permanently.
The subsequent tailwinds will be the additional demand necessary to roll out the vaccine, subsequent re-opening following the point of herd immunity (100MM doses), and then post-COVID reckoning of burnt-out health care workers. Said differently, there should be a long tail for AMN, which remains one of our top Long ideas.
TCNNF
It is important to see movement on Cannabis reform in the first 100 days of the Biden Administration. This week took us one step closer toward the real industry reform with the CEO of TCNNF, Kim Rivers, saying that she expected that the SAFE Act would be included in the House version of the American Recovery Act, noting that this piece of legislation has passed the house three times under Speaker Pelosi.
The bill ultimately failed three times in the Senate, under Republican control. With Democrats now in charge of both chambers, industry insiders and policy experts believe banking has a good shot at becoming law, a much better shot than comprehensive legalization legislation. Even the incoming ranking member on the Senate Banking Committee, GOP Sen. Pat Toomey of Pennsylvania, said he’s open to discussing the issue.
We're not going to get full-scale legalization from this Senate, but we are clearly knocking on the doorstep of reform. Here is why we think Cannabis reform is likely to pass in the 117 sessions of congress:
We remain long on Trulieve Cannabis (TCNNF).
BCO
We expect shares of Brinks Company (BCO) to continue to perform well as the pandemic recedes, and consumers return to cash venues. BCO should be valued like a high quality, route-based logistics company like Uniform Services or Pest Control. If BCO was able to perform well in an exceptionally difficult 4Q20, a pandemic-free 4Q 2021 should generate investor friendly results. Shares of BCO have performed well, but we see more upside as Brinks operations emerge as a post-pandemic winner.
V
While the Financials (XLF) have been relative dogs as of late, they are longs in #Quad2…the growthier, the better... Just look at Visa (V).
Several months removed from the expiration of enhanced UI benefits, domestic spending volumes slowed a bit on the margin, but are holding up relatively well in November, with debit spending volumes proving robust as the recovery in credit spending continues to make progress.
Cross-border volumes remain severely depressed; however, cross-border e-commerce appears to have helped drive somewhat of a recovery in late November despite travel-related spending remaining deeply in the red. With little prospect for a broad lift in travel restrictions, cross-border travel spend is unlikely to meaningfully rebound until sometime in 2022, especially when taking into account the approximately three years required for international travel to recover following the September 11th attacks.
FISV
Fiserv (FISV) is on track to deliver $600 million of cost synergies by 2020, two-thirds of an initially expected $900 million over five years through 2024. Accordingly, the company has increased its cost synergy expectations to $1.2B, while also pulling forward implementation by 18 months to 2022. With Fiserv’s legacy account processing client base, the distribution of FDC’s merchant-acquiring solutions through digital banking channels and the physical branch networks of Fiserv’s clients represents a significant revenue synergy opportunity.
Is disruption in the banking space a threat or an opportunity for Fiserv? Challenged by the growing presence of neobanks and P2P payment platforms expanding into traditional financial services, Fiserv's traditional clients, regional and community banks, are aggressively pursuing digital transformations and increasingly seeking external IT solutions like those provided by Fiserv.
With a diversified and durable revenue mix capable of reliably producing high single-digit, top-line growth, and together with significant operating margin expansion driven by cost synergies, Fiserv is poised to deliver mid-teens earnings growth over the next three years which, given the rich valuations in the payments space, represents a solid investment offering growth at a reasonable price.
POAHY
Porsche Auto (POAHY) is a family controlled holding company that has voting control of VW and holds ~157 million shares (~31%), and little in the way of relevant other assets or on balance sheet liabilities. Those shares are worth about Euro 25 billion vs. Porsche’s cap of about Euro 17 billion, a sizeable discount despite the same functional control position (or better, since Porsche SE holders are in the same position as the Piëch/Porsche). The Porsche car brand is owned and operated by VW. The Porsche SE holding company just holds controlling shares of VW, although it somehow feels more confusing. The gap need not close, but it is a discounted way to buy shares of VW, which already appear to trade for about half what they should.
A pandemic recovery → Quad 2 economic backdrop that should be favorable for shares of VW/Porsche SE. While over-indexed to a European recovery, demographics, reduced public transit utilization/service, and ex-urban trends support auto sales into an aged fleet.
IHRT
We believe growth in digital and podcasts, combined with a cyclical recovery in ad-spend, is likely to drive iHeartRadio (IHRT) higher in the next 12-months. While the radio broadcast market is mature, it is highly localized and therefore less at-risk of disruption from streaming in the near-term.
Meanwhile, we like Liberty Media's involvement, having received DOJ approval to increase their ownership stake from 5% to up to 50%.
GME
Citron research put out a video on 5 reasons to be short GameStop (GME), overall it was not at all compelling but we’re not going to refute all of the points here. However since we were directly referenced in the video, we do want to set the record straight. Citron correctly noted our estimates from our deck, but he cited a price target of $26 pulling the lowest price on a valuation range slide from our presentation.
If you know Hedgeye well you know we don't do "price targets", as in 12 month price target. We will say a price corresponding to a stock call (because people need it) but we think of it more as a fair value range given current information.
As info, volume, volatility and price change with time, generally so does our view of a fair price range. In our Dec deck, we said $GME should at least be valued like other content vs distro embattled 'structurally pressured' retailers. On our numbers and those kind of retailer multiples, we said it was worth a range of $25-$35 ($30 midpoint).
With new management team making changes and Ryan Cohen aiding strategic direction, there's real turnaround chance, that's $100+ opportunity. $100 would only be about 1x our ’21 sales estimate, if this can be a powerful retailer (much more than the perceived seller of game discs) in a huge and growing category of gaming. We’re not saying this is what will happen, but it is a real possibility, and the odds of that have been rising with Cohen becoming more involved.
EXPC
We believe investors are underestimating the potential of e-VTOL growth over the next 3-5 years, with deployment lagging developments due to stringent regulatory oversight. This shift to ‘air taxis’ should reduce the noise and emissions that limit the helicopter operations, opening many new shorter distance routes. Blade (EXPC) has grown well, with traction in wealthier urban areas – it isn’t a pre-revenue offering. Blade is asset light, but has mindshare, market experience, and the travel data that should allow it to keep up with potential competitors.
Given the sizeable move up in EOS Energy and the progression through the de-SPAC process, it is a position that should be a smaller weight. That said, EOSE is a likely acquisition target (e.g. ABB, Schneider) positioned directly in the way of a strong ESG narrative. We’re lingering. But by mid-year, we suspect the travel recovery narrative and the asymmetry of the return profile to make EXPC a more attractive name. We’d weight accordingly.
ZI
At this point, the post-acquisition churn drama, as well as the pricing and business model integration, are mostly behind the company, and ZoomInfo (ZI) has started to nibble back into the acquisition market so they can have more stuff to sell.
ZI is much more profitable than peers. But incremental margins don’t look so great and will look worse with acquisitions sliding in, all of which leads us to conclude that peak profitability is in the rearview. We see risk/reward heavily skewed to the downside. Bulls see best in class product, some positive tailwinds from canceled T&E spending in 2020, trailing growth rates, high margins, and Henry (CEO).
We continue see risk/reward heavily skewed to the downside.
BYND
The 60-year-old company, Jensen Meat, is getting into the plant-based industry. Jensen supplies beef to retailers such as Walmart and Kroger and recently began constructing a facility geared toward increasing production and distribution of plant-based products. The facility is to open in April 2021; it will be capable of various processes, including cooking, hydrating, emulsifying, and forming plant-based patties for distribution to foodservice and retail sectors.
Jensen Meat CEO Abel Olivera said, “We can create, process, and pack plant-based products in ways that are cost-effective and innovative. We want to help bright minds out there that have the same goal of creating healthy, low-cost foods from alternative sources of protein, which also play a part in reducing world hunger.” In May 2019, Jensen Meat acquired vegan brand Before the Butcher, including a 90,000 square-foot production facility and a cold storage warehouse. By December 2019, Before the Butcher tripled the retail distribution of its Uncut-branded burgers and sausages to hundreds of supermarket locations. In October 2020, the brand launched its mainstream Plant-Based Patties to foodservice and retail providers similar to ground beef.
As a reminder, Jensen Meat is not the first beef producer to expand into plant-based processing. In 2019, after experiencing a “supply-demand imbalance,” Impossible Foods partnered with OSI Group (a McDonald’s meat supplier for more than 60 years) to tackle the production challenges of getting the Impossible Whopper on the menu at more than 7,000 Burger King locations nationwide.
This also does not fit the narrative that Beyond Meat (BYND) will be supplying MCD with its plant-based patties when one of its most trusted meat suppliers can do the same thing at likely a lower cost to MCD.
KR
Traffic to grocery stores initially surged in Q1 as consumers stockpiled groceries, then fell off as consumers consolidated shopping trips in Q2. According to placer.ai’s consumer tracking traffic decreased 0.6% YOY in Q3 but improved 9.1% sequentially.
In Q4, traffic to grocery stores decreased by a rate of 0.9% YOY and improved by 0.7% sequentially, as seen in the chart below. Whole Foods has seen the worst traffic declines of the largest grocery banners with an 18.7% decrease in Q4. Conventional grocery chains have been the winner during the pandemic as shoppers consolidated shopping trips, which could reverse when shoppers resume making more frequent trips.
Kroger (KR) remains a short.
HD
A local anecdote, and not overly new, but in the busy Danbury, CT Federal Road Shopping area, Floor and Décor is moving in across the parking lot from Home Depot. The company bought a 150k SQFT building that was formerly occupied by Bob’s stores and Pilgrim Furniture. Home Depot's (HD) sales results over the last decade have shown little sign of competitive pressure with an average of MSD comp growth.
The category has certainly been strong, but many competitors in certain categories continue to grow the store base. Whether its FND, or TSCO, the big chains are taking share from local mom and pops. LOW under new management is becoming more competitive as well. At what point does the competitive landscape really start to pressure growth for the big incumbents like HD?
Since the home improvement category looks like it will see a decline for the first time in a while lapping covid strength, it will be interesting to see how share settles out in various sub categories and how the big players will navigate the sales pressure. We’re negative on HD as very tough compares and rising cost pressures mean the company could put up its first organic earnings decline since the great recession in 2021, and the company still holds a premium 22x PE.
PPC
Hedgeye CEO Keith McCullough added Pilgrim's Pride (PPC) to the short side of Investing Ideas this week. Below is a brief note.
With the US stock market ripping political bears a new one today (to all-time closing highs)... we are finally getting some immediate-term TRADE #overbought signals in some Consumer Staples Shorts (which are shorts in #Quad2) that are going to have to eat Inflation #Accelerating...
One of those names is Pilgrim's Pride. Here's what Consumables analysts Howard Penney and Daniel Biolsi wrote, introducing me to some bear meat:
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Feed costs to pressure protein producers (PPC) Farmers ended in 2020 with higher incomes than in 2019 due to the combination of a rally in prices during the harvest and direct payments included in the Coronavirus Food Assistance Program and Paycheck Protection Program. The USDA estimates that farm income in 2020 increased by 41% from 2019 and reached the highest income level since 2013. Farmers also received $24B or 107% more in direct government payments. Livestock farmers did not fare, and the reduction in herd sizes and the price drop during the plant shutdowns. The rebuilding of China’s domestic pig herd will lead to lower pork exports while the feed costs are increasing. U.S. livestock producers will face the highest feed cost inflation in more than a decade. |
SIRI
Hedgeye CEO Keith McCullough added Sirius XM (SIRI) to the short side of Investing Ideas this week. Below is a brief note.
You know I go both ways, eh? And I like it.
After a market move like this, I have a nice long shopping lists of shorts that have bounced towards the top-end of my Risk Ranges. One of them is Sirius XM (SIRI).
Here's a summary paragraph from Communications analyst Andrew Freedman's Communications Pro research product on the name:
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We added SiriusXM (SIRI) as an active Short in the Hedgeye Communications Position Monitor on 12/18. We believe SiriusXM's attractive unit economics will deteriorate in the coming years (i.e., higher churn, rising content and subscriber acquisition costs) as share of audio engagement shifts to global streaming services. |
